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Fed Signals Tighter Policy - Wealth Managers' Reactions
Tom Burroughes
17 June 2021
The US Federal Reserve yesterday signaled it expects to tighten policy and “taper” its asset purchases – aka quantitative easing – further than it had previously stated. The statement hasn’t greatly surprised wealth managers, but did reinforce the notion that a period of extraordinary monetary expansion is set to wind down. Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson
The large QE programs of the Fed, and other central banks, since the 2008 financial crash, and reinforced by their reactions to the pandemic, have squeezed yields on equities and bonds, and played a big part in encouraging wealth managers to build exposures to less liquid areas such as private equity and debt. An eventual turn in policy could bring some stresses in the system to light.
Here is part of the Fed statement. Below are reactions from a range of firms:
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 per cent for some time so that inflation averages 2 per cent over time and longer-term inflation expectations remain well anchored at 2 per cent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.
“The Committee decided to keep the target range for the federal funds rate at 0 to 0.25 per cent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 per cent and is on track to moderately exceed 2 per cent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee's maximum employment and price stability goals.”
Rick Rieder, chief investment officer of global fixed income and head of the BlackRock global allocation investment team
At yesterday's FOMC meeting, the Committee revealed more expected tightening and further steps toward tapering asset purchases than they had previously. We see these as steps in the right direction. Yesterday’s Federal Reserve statement and press conference suggest that the Committee believes progress has been made toward its goals, but that there’s still some room to go to hit the recently re-defined objective of maximum employment. Still, it’s now time to set up for the end of this long-running emergency-policy-focused movie.
The Fed surprised markets and some commentators revealing the Committee assumes more interest rate increases than previously. We think this is the right move, and the assumptions of the appropriate funds' rate saw a wholesale upward revision in 2023. The median participant now assumes two interest rate increases in 2023, a step in the right direction. Importantly, we also learned yesterday that the Fed appreciates that its-newly set inflation target of above 2 per cent for some time is closer to being achieved.
The Fed surprised markets and some commentators with median inflation forecasts that were revised up in SEP to run above 2.0 per cent in 2022 and 2023, and the assumptions of the appropriate funds rate saw a wholesale upward revision in 2023. Indeed, six participants moved up from zero in 2023, leaving only five dots at no hikes through the forecast horizon. That change likely included most of the Committee leadership and overall, the moves pushed the path of future appropriate policy assumptions to reveal two 25 bps policy rate increases in 2023.
This time there was no denying it; the Federal Reserve took its first tentative steps on a more hawkish path. It was instantly felt in markets. While there was no immediate change in policy, the median projections for interest rates saw two hikes leap into the forecast for the end of 2023. Additionally, the talking about tapering finally began. However, Chair Powell suggested a start to tapering still remained a “ways off” as the FOMC continues to look for further progress in the economy.
The Fed’s economic forecasts shifted higher as it recognized that growth this year is going to be even stronger than it had already forecast. The 7 per cent growth rate expected is now above economists’ consensus expectations, although forecasters are more optimistic about growth in 2022 than the US central bank. Elsewhere, the Fed’s forecasts now show a clear bias to above target inflation in the coming years. PCE inflation is forecast to be above target over the next three years.
David Chao, global market strategist, Asia Pacific at Invesco
Both a tapering of asset purchases and possible interest rate hikes in the US should drive capital back to the US. I expect the dollar to strengthen in the near term on this news. We’re seeing an initial knee-jerk sell action on emerging assets and currencies. I ultimately expect emerging markets to shrug the tapering off this time around, unless the Fed tightens monetary policy earlier and more stringently than expected.
Tiffany Wilding and Allison Boxer, US economists at PIMCO
Amid faster-than-expected growth and progress against COVID-19, US Federal Reserve officials indicated that the next hike in interest rates could come around the middle of 2023 and began talking about the prospect of tapering asset purchases. Released on June 16, the Federal Open Market Committee’s Summary of Economic Projections implies that the Fed could hike interest rates twice in 2023 instead of 2024 or later, as it had projected in March.
In addition, Fed Chair Jerome Powell told reporters that the committee started to discuss the FOMC’s options for ending the bond purchase program. Working backward from the new 2023 projected timing of the first rate hike, we think the FOMC could announce the first reduction in its bond purchase program as early as September.
Interestingly, the more hawkish changes to FOMC participants’ rate path expectations came despite little change in the 2023 unemployment rate and inflation forecasts. This suggests less tolerance for an inflation overshoot than previously thought.